medical practice valuation appraisal
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MedicalPracticeAppraisal.com
Medical Practice Valuationby Keith Borglum CHBC
MedicalPracticeAppraisal.com
MedicalPracticeAppraisal.com
Why Value a Practice ?
Purchase/SaleAssociate buy-inMarital DivorceOwner Exit/Breakup InsuranceLitigation, non-compete,
economic damages
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Financial v. Emotional Value People feel “pride of ownership”
in their businesses and see “value” in the effort made to start and grow it
The market place primarily determines what financial value is represented in the business
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Value v. Price Value is an opinion, not a fact Price is negotiated between two individuals
each with a unique interest Many practices sell for a price above
or below the appraised value A practice can have value without
a sales price, as in a divorce
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Standards of Value
Fair Market Value - to a hypothetical buyer Investment Value - to a particular buyer Fair Value - no buyer involved Liquidation Value - at “auction”
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Premises of Value
Going Concern - ability to generate income despite aninterruption in ownership
Liquidation - income is interrupted,can be “forced” or “orderly”
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Components of Value
Tangible - furniture, instruments, supplies, accounts receivable, withholds & bonuses, cash, postage, pre-payments
Intangible - cash flow, goodwill, location, reputation
Liabilities - loans, debts
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Approaches to Value
Asset - the value of the assembled components, aka adjusted book value, net asset value, accumulation value
Income - the value of the benefit stream to the owner
Market Comparison - what similar practices sold for
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The Asset Approach
Rarely used in small to medium sized medical practices, unless low income
Rarely used for<50% ownershipRarely used in limited-asset businessesSometimes used to value young or
troubled businesses
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The Income Approach The favored approach by the IRS in
Revenue Ruling 59-60
Usually favored for operating practices
Dividend-paying capacity via net cash flow (the individual’s profit above labor) is commonly used
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The Market Approach
Compares the subject to prior similar sales
The subject’s value must be adjusted to the comparable sales for time, place, facts
Typically excludes liabilities, AR and cash
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How to Value Goodwill
Total value minus tangible assetsor
By reportor
By calculation
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Market Comparison
Similar Purpose - sale, buy-in, or divorce Size of practice by collections/group size Method of valuation used in prior transaction Overhead and profitability Year & Place of transaction
– Some studies include pre-2004 Medicare cuts– Some states had short term inflated values
resulting in federal litigation
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Valuing Tangible Assets Fair Market Value under a Premise of Going
Concern considers the used valueassembled in place.
NOT liquidated auction value NOT depreciated tax value USUALLY excludes accounts receivable, cash
and cash equivalents, and assumes liabilities will be paid-off
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Market Value Summary
Must adjust subject value toparticulars of the historicvalue of sold practices.
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The Income Approach - Issues
Best values the income stream above themarket-compensation of owner (ie “dividends”)
Does not differentiate between tangible assetsand goodwill
Requires an opinion of specialty future growth rate, not historic practice growth rate
Requires an opinion of market-rate risk and return
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The Income Approach - Normalizing
Owner’s income must first be “normalized” to include benefits like:– Auto & Entertainment– Health, life, and disability insurances– Exotic-locale Continuing Education– Owner’s salary plus profits– Pension and profit-sharing contributions– Usually uses pre-tax rather than after-tax earnings
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The Income Approach - RiskSmall medical practice is high risk and
requires high returns on investment– Start with 20 year treasury bonds– Add risk for S&P 500– Add risk for small size– Add industry and specialty risk– Add specific practice risk
= Practice Risk ROI needed (“cap” rate)
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Income Approach Summary(simplified)
Normalized Income
- Market Rate Compensation
x Growth Rate
/ Cap rate
= Fair Market Value
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Asset Value If Income or Market Approaches indicate a value
of less than the value of the assets, then use Asset Value as “highest and best”.– If it is a going concern, use fair market value
of the tangible assetswithout a cost of liquidation
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Reconciling Value
The values found by different Approaches usually differ from each other.
You must apply logic, reason, and experience to then find a single value, or range of values.
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Reconciling Value - Example
Method Value Weight Weighted
Market $350,885 40% $140,354
Income $364,466 60% $218,679
Weighted 100% $359,033
Rounded Value
100% $360,000
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Common Appraisal Errors Failure to normalize income properly Incorrect market compensation, failure to consider
full-time-equivalence schedule Failure to consider medical issues like Medicare planned
payment reductions or capitation impacts Using after-tax instead of pre-tax income Unsupported cap rate/ risk too low Using divorce comps for sales transactions, or
unadjusted Goodwill Registry medians
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Critical Valuation Error
Not applying a discount for a minority interest in many (not all) cases– Full value requires “control”– Lack of control creates a discount disproportionate to
the reduced interest 49% of a $1,000,000 corporation may have a value near zero The 51% owner can do anything they please with the
company and assets
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Choosing an Appraiser Should be member of a legitimate
appraisal association like IBA or ASA, and follow industry standards for reports, like USPAP
Should specialize in healthcare –most appraisers either do mostly/only healthcare, or none at all
There are levels of appraisal- choose the right level for your purpose
If you need a practice broker, use a licensed broker, even just for advice.
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Summary: What is a Practice Worth?
It all depends on the facts!
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Keith Borglum CHBC
Certified Healthcare Business ConsultantLicensed Practice Broker & Appraiser
Faculty or Consultant for many Medical Associationsmore info and CV at
Medical Practice Appraisal.com
You wouldn’t refer to an “unlicensed doctor”. So don’t use an unlicensed, uncertified “consultant”!
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